EXTERNAL GROWTH Refers to b. growth through dealings with outside org. Benefits: -much faster way to grow and evolve -quick way to reduce competition in a market -can bring about greater market share -a sharing of good practise and ideas The main disadvantage is cost. JOINT VENTURES A joint venture occurs when 2 or more b. decide to split the costs, risks, control, responsibilities and rewards of a b. projects. Parties involved in j. v. agree to set up a new legal entity. (Sony Ericsson) + *higher sales and market share but without having to lose their corporate identity *spreading of costs and risks: j. v. can allow firms to diversify their products *entry to foreign markets by forming an agreement with overseas firms *relatively cheap as a method of external growth *exploitation of local knowledge *competitive advantage: competition may be reduced by forming a j. v. Their collective size may also mean further economies of scale and scope can be enjoyed *high success rate: j. v. tend to be friendly. .
- drawbacks of j. v. and strategic alliances *partners in the j. v. tend to rely heavily on the resources and goodwill of their counterparts *there is likely to be a dilution of the brands, yet firms spend huge amounts of money in trying to develop their own brands *when firms work together on a project, there is likely to be some sort of organizational culture clash STRATEGIC ALLIANCES 2 or more b. seek to form a mutually beneficial affiliation by cooperating in a b. venture. Affiliated b. remain independent org. + The main purpose of s. a. are to gain synergy from the different strengths of the members of the alliance and the pooling of their resources. By working together on a large scale, they can all gain from economies of scale. Customers likely to benefit from the added value services under a s. a. , such as convenience of access to wider channels of distribution
MERGERS AND TAKEOVERS Refer to integration of 2 or more b. to form one single company. New firm will benefit from economies of scale and a larger share of the market The merger takes place when 2 firms actually agree to form a new company-usually friendly(Daimler Benz and Chrysler, Hewlett-Packard and Compaq) A takeover occurs when a company buys a controlling interest(enough shares to hold a majority stake)in another company(Google acquired You. Tube for $1. 65 billion)-usually unfriendly, hostile takeover. . + of M & A *greater market share: greater market power and a larger customer base *economies of scale *synergy(1+1=3) *survival(the merged firm is in a much stronger position to compete with rivals) *diversification - of M & A *loss of control *culture clash: changes to the firm’s core values and mission statement; difficulties for employees trying to adapt to new management styles and new methods of working *conflict: regarding the purchase price or the conditions attached to a merger or takeover *redundancies *diseconomies of scale: increased bureaucracy, slower channels of communication *regulatory problems: governments may be concerned about the merger or acquisition of firms
The degree of success of M & A depends on: -the level of planning is crucial -a clear rationale of the benefits must be communicated to key stakeholder groups to win their support -managers will need to exert their negotiation skills and be able to handle the added pressures. . Due to diseconomies of scale, not all merg. and acq. are successful. In these cases demerger might take place. A company might choose to demerge in order to: -offload unprofitable sections of the b. -avoid rising unit costs and inefficiency by being too large -raise cash to sustain operations of existing parts of the b. B. that become too large will often choose to downsize(rationalization). Factories, stores or outlets will be closed down or sold off and staff redundancies will take place to cut costs. Rationalization will also allow the b. to focus on its core products rather than struggle to handle a diverse product portfolio. Management buy-out is a defensive strategy: it involves management team of the target b. (b. faced with a hostile takeover)buying shares in the company to become the owner, part-owner, preventing it from being taken over Another alternative to a complete takeover of a target b. is to buy just one of the brands from the firm-brand acquisition strategy(BMW bought Rolls-Royce brand to enhance its product portfolio). Firms may decide to sell one of their brands if they are facing a liquidity problem
FRANCHISES A franchise is a form of b. ownership whereby a person or b. buys a licence to trade using another firm’s name, logo, brands and trademarks. The purchaser of a franchise(franchisee)pays a licence fee to the parent company of the b. (franchisor). The franchisee also pays royalty payment(usually set as a % of any profits made by the franchisee)-Mc. Donald’s, Pizza Hut… The benefits of franchising as a method of growth for the franchisor: -rapid growth without having to risk huge amounts of money -national or international presence without the relatively higher costs of organic or external growth -can benefit from economies of scale -growth without having to worry about running costs such as staff wages, purchase of stocks… -receive a royalty payment -local franchisee have greater awarness of local market conditions + for the franchisee -relatively low risk since the franchisor is well known(tested formula) -lower start-up costs(such as market research and product development) -added services from franchisor such as advice on financial management, training for staff -large scale advertising used by the well-known parent company; franchisee receives”free”advertising and promotion
Pitfalls of the franchising to the franchisor: -difficult to control the activities of franchisee and to get them to meet the quality standards -huge risk when allowing other people or b. to use their names(not to harm their reputation) -although is faster than organic growth it is not as quick a method of growth as mergers or acquisitions The disadvantages to franchisee: -the money needed to pay a franchise can be very expensive -franchisee have to pay a significant % of their revenues to the franchisor -there is less flexibility for franchisee to use their own initiative or to try out new ideas beceuse they are constrained from doing so by the franchisor
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